RFC: ENS Governance Enhancements (Flipside Crypto)

Disclaimer: I currently represent a delegation for flipsidecrypto.eth

As ENS welcomes new users and contributors we are hoping to steer this DAO towards continued product development, refinement, and growth.

TLDR: Flipside Crypto is proposing an enhancement to the ENS voting system, intended to more fairly distribute voting power within the DAO and create demand for ENS names. Two options to do so:

  1. A hybrid model, incorporating both ENS names and ENS tokens
  2. A quadratic NFT-based voting system (using ENS names) on Snapshot to boost protocol revenue and create a more fair distribution of voters.

The Problem

ENS is in a unique position as it lays claim to two types of tokenized assets:

  • ERC20 ($ENS)
  • ERC721 (ENS names: NFTs)

While ENS names remain coveted due to social pressure and widespread integrations, their durability is challenged and $ENS tokens are being criticized for their lack of utility (See post)

These critiques can be attributed to two problems:

  1. governance power is unfairly distributed across $ENS holders
  2. buying ENS names is no longer being incentivized

ENS’s revenue is entirely dependent on ENS registrations and renewals. With the introduction of a governance token, this is often forgotten. New ENS name holders are no longer incentivized with the allure of a possible airdrop nor does it give them voting rights. The current voting powers of ENS are archaic and rewarded early adopters of the product.

Delegation & Distribution of Governance Powers:

According to Tally, there are 11.85K voters out of 57.3K token holders - equating to a 20% participation rate. This is good for crypto, but not good enough.

We would like to see this number 2X with an end goal of majority participation - 51%

Redelegations are low. This means delegation has remained mostly the same since the original airdrop, see the chart below:

This steep decline and flatline result in stagnant voting power without much change. On average, there are 1.015 ENS delegations per wallet.

After receiving the airdrop, users are neither incentivized to buy more ENS tokens nor names.

Let’s look at the distribution between top delegates:

These 10 addresses account for 99% of the voting power within the top 100 delegates (see post). This is not ok.

ENS Registrations & Renewals:

Below is a chart showing the total registrations since inception:

After a spike in November in users’ attempts to airdrop farm, new registrations have retraced a bit. It shows growth from August numbers but is depressed from its November/December highs.

Renewals remain less than non-renewals:

With 57.8% of all ENS holders not renewing their name, we as a DAO need to do a better job of incentivizing renewals and creating more revenue for the DAO.

The Solution

This is the first draft for a framework for improved liquidity of $ENS and improved utility of the ENS names themselves, ERC721s.

Our goal is to benefit both the community and the DAO. This means creating greater revenue, driving ENS name registrations, and a more fair distribution of voting power.

To do so we propose the following potential paths forward:

A hybrid voting system:

One option would be allowing $ENS holders to still have voting power while incorporating ENS name holders. These ERC721 tokens voting power would also be subject to a multiplier, to balance the voting power. An example calculation for this multiplier would be:

Screen Shot 2022-02-28 at 1.10.27 PM

With this calculation, we are able to see the name equivalent of ENS tokens. In this case, one ENS name is worth 1.29 ENS tokens. Multiply this value by ENS names to derive total voting power:

This could be viewed as an aggregate voting power, ala a SUHSIPOWAH construct.

Please note this is an early calculation and open to suggestions. Dividing by 2 aims to avoid placing a premium on ENS, eliminating delegation, and creating selling pressure for $ENS.

Quadratic voting via ENS names:

1 ENS name = 1 VOTE.

For example, if someone has 3 ENS names they have three votes. 10 names,10 votes etc.

And furthermore, you could make it quadratic - where shorter names (more expensive) have a multiplier and wield more voting power.

This is possible through metadata and would prevent people from farming names for a vote.

This is a much better model than if one person with one name has 500 tokens versus someone who bought 3 at an early stage and is now left with 10,000 tokens due to a multiplier.

Stats per Flipside crypto:

  • 76% of holders have a single domain registered on the service
  • currently, 541k total ENS names are in circulation

In this model, users will still be able to delegate and can create a variable quorum, a function of current names in circulation.

Each ENS name is an ERC721 token, capable of holding its own power. Current Snapshot strategies support NFT-based voting and can integrate this change if approved.

Next Steps?

We would love to gather feedback from the community on implementing one of these options within the DAO.

If there is interest, our next proposal would aim to outline a world where $ENS is more than another governance token. A world where the token can be used to buy ENS names.

This acts as a buy-back function for the DAO while prices remain depressed.

By pairing these two proposals, it benefits both the community and DAO:

  • The DAO owns more ENS and is incentivized to make its value worth more
  • $ENS added utility - ability to spend and more yield
  • More revenue for the DAO due to incentivized renewals and registrations
  • More fair distribution of voting rights

Worth discussing? We’d love to hear your feedback below!

5 Likes

This looks really interesting but I have to say I don’t understand the voting equation. What is TWAP? Nevermind I googled it. Total Weighted Average Price? What is the weighted part then?

1 Like

Hey @daylon.eth! Thanks for taking the time to read.

TWAP is “Time-Weighted Average Price” - it is an industry standard for finding the average price of an asset over a certain time period.

We are still working to figure out what the best period is. 60 days? 90 days? etc.

We’d love your input. As a reminder, this proposal is just a start!

2 Likes

Ah, thanks. It might be too complicated, but maybe the time period could be calculated from the time of the airdrop snapshot? To me that seems most fair to everyone that wants to participate. It would have the added benefit of looping in those that missed the airdrop but still became active after it.

1 Like

Thank you for the detailed proposal. I think you’re trying to solve a problem that isn’t a problem, though. ENS tokens were deliberately not allocated in direct proportion to number of ENS names owned, because we wanted to recognise dedicated ENS users, rather than disproportionately rewarding name squatters and speculators. I don’t think there’s any reason to change that at this point.

That’s a funny way to say “name registrations continue to be twice as high as they were before the DAO launch”!

4 Likes

Thanks for being thoughtful here, Nick!

I do believe that any token-weighted voting models dominated by whales (even with delegation) will disincentivize participation from the vast majority of small stakeholders.

This is pervasive in other DAOs with similar governance constructs and has been a well-documented problem that many wish to solve.

I’m sensitive to the fact that top delegates will not be so keen to potentially have their voting power impacted - but there are benefits to exploring a new model that integrates ENS name holders into governance. Revenue for the protocol being a major driver of such.

As a means to incentivize renewals, encourage re-delegation, drive purchase of new ENS names, as well as level the participation playing field in the DAO - this seems like something we should explore as an organization.

1 Like

The problem is that a voting system weighted by name ownership does not remove this issue - people can simply buy many ENS names to obtain many ENS votes, instead of buying tokens. Further, it gives a disproportionate voice to participants who have purchased a lot of names with the intention of resale, over and above those who actually use ENS for its intended purpose.

Quadratic voting is of little use without some way to verify identity; it’s trivial for people to spread their holdings across many accounts.

1 Like

I think this is directionally correct but I don’t believe it solves the issue as stated.

Giving Voting power to ENS Domain NFTs is an interesting use case. And it would be an added bonus to anyone holding domains and/or planning on purchasing. But I don’t think this will drive any type of momentum towards purchasing or token value. My guess is that most people buy .eth domains for personal use or of re-sale and make profits, and may not even think about buying ENS for voting right.

If we are after revenue and token value, there is no other catalyst that could help drive that outcome other than incentivizing the Token holders, not for holding the token but for participating in there DAO.

A few proposals would be:

  1. The use of $ENS as means for purchasing ENS domains offering a bonus for using it.
  2. Small portion of the revenue is distributed as $ENS dividend airdrops to addressed delegating their tokens following a distribution curve the incentivizes Delegator proliferation. Basically staking but with certain rules to avoid centralized voting and to encourage delegator growth.

Maybe I am way off topic. If token value is what is being discussed, there needs to be a catalyst for adoption, purchasing and retention.

Personally, I do believe the ultimate power of the ENS token is voting power. And this power, unfortunately, is very centralized at the moment.

1 Like

Delegate concentration is certainly something to monitor, but in comparison to other centralization problems, it’s the easiest to solve. Because $ENS holders can change their delegation at will, power is ultimately held by the $ENS holder, not their temporarily chosen delegate. The real concern should be whether $ENS token distribution is too concentrated (either by whales, insiders, exchanges, etc)

The current $ENS token distribution is:

  • 40% to 11 core contributors (these tokens haven’t actually been released yet)
  • 10% to 500 other insiders/employees (also not released)
  • 50% to 137,000 early adopters (which includes anyone who purchased $ENS at market after the airdrop)

Early adopters/employees have certainly been rewarded with governing power, but the treasury airdrop has endowed the DAO with the power to dilute these early adopters by 100%! How the DAO chooses to allocate its $ENS airdrop will, in my opinion, have a substantial impact on the long term health and sustainability of the project. I agree with you that ample room should be made for newcomers; failure to address the power imbalance held by early adopters could really alienate future users.

The flaw of $ENS is that the airdrop captured just a single moment in time; it doesn’t organically grow with the actual ENS user base. In 10 years time, which group of people should rightfully hold the reins of power?

  • $ENS speculators/hodlers, who may not even own an ENS domain
  • ENS domain owners, who must renew their commitment to the project annually and “use ENS for its intended purpose”

I understand that some ENS holders are squatters, but is that any worse than being an $ENS speculator? At least squatters are paying into the DAO treasury every year, and their incentives might even be better aligned with the broader ENS community.

I think some type of bicameral governance system, where ENS domain owners hold some amount governance power, could make sense.

2 Likes

Sure people can just buy names, but at least then they are generating revenue for the DAO - if we have to agree that both models have their deficiencies, at least err on the one that provides additional benefit.

So what if people buy names with the intention of resale? It is better than people buying a ton of tokens to do so - at least you’re incentivizing product usage.

The “purchase lots of ENS names” model to gain voting power has its limitations - the names expire, so even if they wanted to HODL for ownership and influence, it would still benefit the protocol long-term via renewal, as opposed to folks just sitting on tokens and providing no value to the protocol whatsoever.

Nice proposal @fig but this section I quoted had my eyebrows raising…

I only own one ENS and only plan to hold one, and I have actively been buying more $ENS tokens and delegating them to multiple delegates (not just the same one delegate). Which does not seem to be your average user behaviour from what I read above, that is fine.

Although that a domain camper will have more weighted voting than users like me sounds very worrying to me. For example I have a friend who is a domain camper and has a wallet with 40+ ENS in there, they told me they sold all the governance tokens upon getting the airdrop (which is their right). I would argue that they (and other domain campers) are less interested in the DAO and than users who are voting or delegating their $ENS tokens.

I find that mechanism of using the $ENS token for voting and to now consider adding other value / utility to the tokens to be more interesting of an approach than what you propose above. Just my honest opinion.

Hey @NicLaz.eth , thanks for your feedback!

As reminder, that strategy is one of two potential enhancements. As someone who owns an ENS and $ENS tokens you may be interested in the first option.

It adds a bit of power to those with ENS names but does not eliminated the weight and importance of $ENS tokens altogether - if you feel there is still too much of a premium, we can adjust the multiplier to something a bit more fititing.

While your friend may be a “domain squatter” - these names expire, and he is forced to renew and contribute revenue to the protocol. This is not the case for $ENS tokens.

We do hope to find more utility for $ENS! A tease at a follow proposal would be allowing $ENS holders to buy an ENS name at a variable discount (see Next Steps)

Very rudimentary ideas but am aligned on the importance of a stronger token too.

3 Likes

Thanks for the return @fig

Makes sense, and the renewal by a potential domain squatter also helps the DAO Treasury.

For sure we are only at the beginning of considering ideas on how to add utility to the ENS tokens, I do appreciate your proposal here.

1 Like